The impact of the new supervisory review process in EU …€¦ · · 2016-03-11THE IMPACT OF THE...

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THE IMPACT OF THE NEW SUPERVISORY REVIEW PROCESS IN EU

RENZO TRAVERSINI, SENIOR DIRECTOR, SAS RQS



BANKING REGULATION

IN EUROPETOPICS OF THIS PRESENTATION

• Incoming regulatory actions

• Model Quality Review

• New IRB

• New SREP

• Impact

• SAS



INTERNAL MODELS

FOR CR IN BANKSISSUES IN CREDIT RISK ESTIMATES ACROSS EU BANKS

http://www.economist.com/news/finance-

and-economics/21587225-close-scrutiny-

europes-banks-may-turn-up-unexpected-

shortfalls-gentlemen-start

Gentlemen, start your

auditsClose scrutiny of Europe’s

banks may turn up

unexpected shortfalls

The Economist - Oct 5th, 2015

http://www.economist.com/news/finance-and-economics/21587225-close-scrutiny-europes-banks-may-turn-up-unexpected-shortfalls-gentlemen-start



INTERNAL MODELS

FOR CR IN BANKSECB APPROACH TO RISK WEIGHT VARIATIONS

• Risk Weights are determined by PD, LGD and CCR models under the IRB approaches

• Regulatory actions:

• One-time : model quality review campaign across EU banks

• Regime : review of supervisor assessment methodology for IRB Approach

• Model Quality Review (from ECB) – now expected to start, will continue over the next 4 years, covering all

Banks supervised by ECB. Will review all existent models in use.

• New methodology for Supervisors assessing Institutions on IRB Approach (Technical Standard defined

by European Banking Authority, EBA) – discussion paper being submitted to European Commission by 2015.



NOW MODEL QUALITY REVIEW

• In the context of the Comprehensive Assessment, ECB set up a program for the review of all

models used by the Banks under direct supervision (123 Institutions)

• Current estimate is that the 123 Banks are using approx 7000 models

• All models will be validated by ECB

• ECB estimate approx 4 years to complete the task

• Service providers have been asked to submit for support.

• http://www.ft.com/intl/cms/s/0/08003650-42a2-11e5-b98b-87c7270955cf.html#axzz3pgkiLOTY

http://www.ft.com/intl/cms/s/0/08003650-42a2-11e5-b98b-87c7270955cf.html#axzz3pgkiLOTY



COMING NEW IRB ASSESMENT GUIDELINES

Assessment methodology for rating systems design,

operational details and documentation (p. 60)

Key issues:

• Full documentation of model design

• Sound model design framework in place, including

promotion to production

• Sound model validation and monitoring system in

place

• Sound data quality in place

Guidelines are pending adoption by European

Commission in 2015.



MODEL QUALITY REV,

NEW IRB ASSESSMENTCONSEQUENCES

• Re-validate all current models in place

• Demonstrate to Supervisor an appropriate model management framework:

• Management of data for model development and validation

• Model development documentation

• Model inventory

• Model validation environment

• Model monitoring environment / reporting

• Estimate of model impact

• Governance of models / management of model risk

• All banks whose model development environment and/or model validation & monitoring environment are not

up-to-date will need to improve, investing more in those aspects



BANKING REGULATION

IN EUROPESREP

The EBA proposed a new standardized approach to the

supervision process with the draft of the “Guidelines for

common procedures and methodologies for the supervisory

review and evaluation process” (SREP guidelines) of July

7, 2014 (fulfillment of article 107 Para. 3 CRD IV).

Those guidelines are to be applied by the ECB as well as

the national supervisory authorities of the EU when

assessing and evaluating the institutions.

The guidelines are to be applied from January 1, 2016 on,

whereas interim arrangements are planned for

implementing regulatory measures.

https://www.eba.europa.eu/regulation-and-policy/supervisory-review-and-evaluation-srep-and-pillar-2



NEW SREP SREP FRAMEWORK

EBA Guidelines introduce a common SREP framework that includes

4 specific components:

• business model analysis;

• assessment of internal governance and institution-wide control

arrangements;

• assessment of risks to capital and adequacy of capital to cover

these risks; and

• assessment of risks to liquidity and funding, and adequacy of

liquidity resources to cover these risks.

Regular monitoring of key indicators is used to identify material

changes in the risk profile of Banks.

For each Institution, the 4 components of the SREP framework

are assessed and scored on a scale of 1-4.

The outcome of the 4 assessments forms the basis for the overall

SREP assessment, which represents the up-to-date supervisory

view of the institution's risks and viability.

The summary of the overall SREP assessment is the final outcome

produced by Supervisors. It should form the basis for supervisory

measures and dialogue with the institution.



NEW SREP SREP FRAMEWORK



NEW SREP IMPACT ON RISK MANAGEMENT SYSTEMS

To cope with the New SREP process, Banks are currently

planning improvements or even full re-engineering of several

components of the Risk Management System.

Changes linked to new SREP assessment components

structure:

1. Monitoring of key indicators

• Extension of existing quarterly reports to competent

autorities (medium/low impact)

2. Business Model Analysis

• Ability to simulate strategic plan with institution

specific scenarios (medium impact)

3. Internal Governance and Controls

• Compliance with BCBS239 RDAR general

requirements (high/medium impact), in particular on

risk data management, data quality and reporting

4. Risks to Capital Assessment

• Internal capabilities for Stress Testing and Model

Risk are more relevant. Every single type of risk should

be qualified via stress test on an institution-specific

scenario set. (high impact)

• Need for more integration of Planning (i.e. Finance)

and Risk Management systems and data structures to

be able to deliver overall forward looking risk to capital

assessment (medium impact)

• Improvement in the analysis of business environment –

Ability to generate institution-specific scenarios

• Top-down and bottom-up analysis systems are needed

to sustain interaction with Supervisor authorities

5. Risks to Liquidity and Funding

• Same as previous point (high impact)



NEW SREP CONSEQUENCES

• Many more model to include into the model management framework:

• Stress Testing (regulatory exercises and internal modeling)

• Business Models

• Need to simulate models onto full portfolios to fine tune

• Need to include scenario management across risk models

• Need to account for balance sheet impact of models / scenarios



SAS VISION FOR

RISKHOW TO SUSTAIN OUR LEADERSHIP POSITION

Improve our position on

• Organizational Strength

• Customer Satisfaction

Maintain top position in:

• Functionality

• Core Technology

• Market Presence

• Innovation

• Global SAS Organization

• New Risk focused global unit

• Development Priorities

• Directional Themes



RISK RESEARCH AND

QUANTITATIVE SOLUTIONSWHAT’S NEW

• Single point of contact for Risk: New division restructures and consolidates multiple divisions, creating

alignment on objectives/priorities; leadership and direction (vision) responsibilities lie within RQS

• Organization now aligned to better execute: R&D with clear set of goals managed by Solutions Leads and

driven by customers/market; delivery (PSD and other) in-sync with goals and objectives of RQS; SSO Risk

offerings being reconciled and coordinated with RQS

• Disciplined and focused: SAS Risk will focus on markets where we are well positioned with our expertise,

our risk solutions, and our ability to deliver.

• Architect for the long run but embrace the need to adapt: Rationalize the risk portfolio and investments;

reusable components; products designed to evolve; products and solutions designed with the ability to easily

incorporate (and mange) content/IP

• Customer driven agenda: Engagement model that embraces collaboration; RQS Risk Business Consulting

capabilities (industry SMEs) to deepen relationships and trust; partner along for the entire journey

• Relevant and compelling content: Risk solutions must ship with content (IP); enabled by hiring SMEs,

partnering with consulting firms, and/or direct customer collaboration



THEMES AND PRIORITIES

Enhancing usability and workflow

Adding out-of-the-box capabilities

Streamlining our product offerings

Improving scalability

Strengthening our core quantitative competencies

Content-rich solutions

Risk Management as well as Risk Measurement

Premier Risk Quantification Engine

Focus on Major Risk Areas

High-Performance Scalability

Address Evolving Regulatory Compliance

DEVELOPMENT PRIORITIESDIRECTIONAL THEMES

SAS RISK

MANAGEMENT

15



NEW REGULATIONS SAS VIEW

• Continue / expand capabilities of SAS Credit Scoring and related solutions

• Provide a Model Governance solution

• Improve SAS Risk platform capabilities to better support analyst in managing models



CREDIT RISK

MODELINGSAS CREDIT SCORING FOR BANKING

• Credit Scoring – new topics under development

• Connection with Real Time Decision Management solution

• Limit management

• Coverage of extended set of models

• Regulatory Risk Management for Banking

• RWA Calculation

• Reporting



MODEL

GOVERNANCESAS MODEL RISK MANAGEMENT



MODEL ANALYST

SUPPORTSAS MODEL IMPLEMENTATION PLATFORM



BCBS239 THE NEXT GENERATION RISK MANAGEMENT

Data

Models

Processes

Risk Data management

Comprehensive Risk Data Governance across Banking Group LEs

Full alignment with Finance

Appropriate risk analysis & reporting capabilities

Risk modelling activities

Development and deployment environments for all risk models

Validation of all internal risk models formally supported

Monitoring and Maintenance system in place for all risk models

Risk Information processing and decisioning

Automation of all relevant risk processes

Performance of risk aggregation and reporting processes ensured

Governance of risk decisioning fully covered



BANKING REGULATION

IN EUROPECONCLUSIONS

• Regulations are forcing Banks to review their Risk Model Management operations

• There is an increasing need for

• Improved Data Quality

• Extended capabilities for Model development, validation, monitoring

• More Governance and support to Supervisor engagement

• Stress Testing and IFRS9 will push all this topics even more

• SAS is focusing development along

• Evovling existing modeling solutions

• Complementing those solutions with an extended modeling and governance platform

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